Meet the economic gangsters

The dismal science of economics is, by most definitions, about finding the most efficient allocation of resources.

And that goes for individuals, companies, governments and — yes — criminals.

Edward Miguel is an expert on that last category. He's the co-author, with Raymond Fisman, of “Economic Gangsters: Corruption, Violence and the Poverty of Nations.” Published in late 2008, the authors use new data, innovative number-crunching and various pattern recognition models to plumb the worlds of kleptocrats, corruption, black marketeers and violence.

Miguel is a professor of economics and director of the Center of Evaluation for Global Action at the University of California, Berkeley. We caught up with him recently to discuss his ideas, and what economic gangsterism can teach us about the world.

What is an economic gangster?

Economic gangsters come in all shapes and sizes. You can think of Asian dictators who build up networks of crony capitalism to enrich themselves, their families and their friends; you can think of African warlords and rebel militia leaders who smuggle diamonds to fund their militia groups. Economic gangsters are people unconstrained by conscience or morals but are well understood within the paradigm of economics: the paradigm of wealth-maximizing individuals who use violence, corruption and bribery to enrich themselves. And those individuals are found in all societies. In the U.S. context, what would have happened if Al Capone had become mayor of Chicago or president of the United States? What would our society look like? Unfortunately for people in poor countries that’s the case. Very often the president is an economic gangster.

In the book, you use parking tickets that U.N. diplomats paid (or didn’t) to make assessments about corruption in their countries of origin; you used fomer Indoneisan President Suharto’s fluctuating health and the rise and fall of Jakarta's stock market to chart which companies were in cahoots with the government; you used rainfall data to understand violence in central Africa. Would you characterize this as a nascent field of economics? There are a couple different types of work in the book, but some is tied to forensic economics. Precisely because what economic gangsters do is illegal, there’s rarely good data on their activities. It’s hard to get good data on bribes or corruption because no one’s collecting that kind of data. We have to come up with other methods to measure these activities. So it has this kind of forensic feel. We’ve brought a different sensibility to some of those debates, different data sources and different statistical approaches that are really more from economics, and that’s why we’ve been able to have some new insights, like this pattern we talk about in the book between bad rainfall and civil war in Africa. That’s something that was new and stimulated a lot of new research.

In the past the connection between poor economic prospects and spikes in violence has been fairly well established. But it’s unusual to take it one step further by using rainfall data — and droughts — to explain why economic prospects dwindle in the first place. How did you hit on that as means to understand what was happening on the ground?

I was doing research in Tanzania and I found out about this very strange phenomenon of witch killing that was going on. As I started investigating and collecting more data, I came across this very strong pattern between rainfall and witch killing. It had a clear economic interpretation: that in years of extreme scarcity households will do whatever they can to survive, and that may include eliminating certain members of the household, usually the elderly, and elderly woman in particular. Once I found that pattern, I wondered whether that pattern held more broadly — not just localized forms of violent crime, the murder of these old women as witches, but in terms of society-wide forms of violence. And sure enough, we got the data a few weeks later, and we did the analysis and the pattern was there, too.

Botswana has become the shining example for the rest of sub-Saharan Africa in that it’s widely touted as a success story. What does that country have that others don’t?

Botswana is an interesting case in many dimensions. They have free and fair elections, they’ve had good economic growth, they have political stability rather than war. And when people try to figure out the reason, they say: well they have so many diamond mines, that must be part of the story. But that’s certainly not enough. There are plenty of African countries rich in resources who have been disasters. Sierra Leone, where I’ve worked, is a good example.

One thing that sets Botswana apart is their early leadership did institute social programs that provided a safety net for the population that ensured against economic shocks, so the government wasn’t being run by economic gangsters trying to plunder the country.

In the chapter about Indonesia, you mention that the country in fact did fairly well economically, had economic growth, in the midst of all this collusion between private enterprise and the Suharto government. Corruption can, in some cases, lead to positive outcomes in spite of itself. How do you explain that? It isn’t that corruption necessarily was good for growth. It’s probably the case that all that corruption in Indonesia still stifled growth, but it wasn’t as bad as it might have been, and part of the reason is that the whole corrupt crony system in Indonesia was actually quite centralized and well organized. Essentially in that case corruption was acting as a tax, and Suharto and their family and cronies got their cut, their 10 to 15 percent. But they never asked for 50 percent or 80 percent, so it was a very sort of pervasive system, but it was never blatant enough or large enough to put legitimate businesses out of business.

The other kind of corruption is the very chaotic kind, where every single border guard, every customs official, every tax collector is on their own shaking people down for bribes, and in that case, without the coordination, the centralization and the control, corruption can be a lot more damaging because in those cases you don’t know what the price is for anything.

We don’t make the claim that corruption is ever good, but there are forms that may be less bad for economic growth than others.

Where do the Somali pirates fit into the economic gangster model?

Somalia is like the perfect storm: no government, incredible poverty and a really lucrative shipping route right by their coastal waters.

In terms of how to stop it, surely in the long run if there were an effective government in Somalia there’d be less piracy. I do think that it could be productive to think about alternative employment opportunities for these Somali fishermen who have these boats.

If they were put on salary, where they weren’t desperate looking for food or their next meal, basically, this would only increase the cost of shipping 0.5 percent, something tiny, but those crumbs could be a lot for these Somali guys with their boats.

You could even have the other side, where Somali fishermen get a reward for reporting on any Somalis who are going to engage in piracy or get a reward for handing over any of their comrades who were engaged in piracy. So I think there may be a smart way to do it if the world major powers got together.